The OTS report, published today, suggests numerous changes to a VAT system “awash with layers of complexity”. The blockbuster recommendation is to drastically lower the VAT threshold from its current level of £85,000 (one of the highest in the world).

The report doesn’t make an outright recommendation, but it does ponder the consequences of lowering the threshold to a level that is close to or below the national average wage (£26,000).

This would bring around one million extra businesses into the VAT fold, and “make it harder for businesses that wish to illegally evade VAT to remain undiscovered”.

A lower threshold would also herald MTD’s return as a relatively immediate concern for small businesses. The OTS report admits: “Many small businesses would also face increased administrative costs”, since “a lower threshold would result in a greater number of businesses being mandated and required to obtain relevant software to submit returns to HMRC”.

The burden on an already stretched HMRC would be pretty severe, too. “HMRC would suddenly have a million new VAT applications,” said Neil Warren, an independent VAT expert. “It would probably take them a year to work through it.”

How the government would potentially go about introducing the radical lowering of the VAT threshold is another burning issue. According to Warren, there are a couple of approaches.

“They could bring it down by £10,000 every year for five years, for example,” said Warren. But this would only move the “cliff edge” the OTS identifies in its report, where many growing businesses deliberately avoid expanding beyond the VAT threshold.

It results in a “very visible bunching of businesses just before the VAT threshold, and an equally large drop in the number of businesses with turnovers just above the threshold,” the OTS wrote.

Lowering the threshold gradually, Warren said, could exacerbate this issue further. “You’re creating a different figure on the cliff edge. Sometimes the bold measures are the best ones”.

If the threshold was to be lowered, Britain’s small businesses would also become closely acquainted with VAT’s byzantine, sometimes arcane rules: as Warren puts it, “shark infested waters”.

AccountingWEB readers may be familiar, for instance, with the VAT intricacy around Jaffa Cakes. After an epic court battle they are classified as a cake, not a chocolate-covered biscuit, so are zero-rated.

The VAT system is riddled with these sorts of taxonomic gymnastics: a gingerbread man with chocolate eyes is zero-rated, but if it has chocolate trousers it is standard rated.

If small businesses are brought into the VAT system, all of this will need to be ironed out, said the OTS’s tax director Paul Morton. The OTS report says business will require “better and more accessible guidance” and “a less uncertain penalty system”.

And the report zeroes in on specific areas of technical difficulty, including: the partial exemption regime, the capital goods scheme, the option to tax and other special schemes.

“This report presents an opportunity to start addressing the many anomalies of VAT,” said Angela Knight, chair of the OTS Board. “The tax is awash with layers of complexity reflecting both its evolution over the last 45 years and aspects of the Purchase Tax that VAT replaced.

“For small businesses, this report will propose ways of simplifying many irritating administrative technicalities and kick off a debate about the registration threshold.”

Not sure that any tax should be made simpler imho. Each case should be treated on it's own merits and for that to work there need to be trained and valued experts who get paid for their time and a common set of rules (like we already have) so that it's not (all) going to be down to which tax inspector and which judge had a bad night, has an overfull court schedule or sees easy pickings and needs to reach a target.

Just shows how detached from reality these people are. Yes, there's a huge population of business just below the VAT threshold. They aren't "avoiding" VAT, they are closing an extra day (in the case of our cafe owner client) or similar. They do this because to lose 1/6th of their overall income by opening that extra day would make it pointless going to work

The situation you have described is exactly the mischief the proposed change would attack. The allegation is that national output and overall prosperity are reduced by a meaningful amount because many small businesses deliberately turn away work so that they can stay under the VAT threshold. The new mischief that the proposed change will create is that the pricing advantage that many unregistered consumer-facing small businesses possess will disappear. This will result in a substantial decline in the number of small businesses because their bigger competitors will no longer have a pricing disadvantage. The self-employed cleaners/gardeners/builders/ and the small cafes and shops who don't have to register for VAT are at present able to charge lower prices than bigger registered businesses. They won't have so much of an advantage if they have to charge the same VAT as their bigger competitors and some of them will go under.

I've said it before and will say it again. Every time I hear of the Office of Tax Simplification, I am reminded of Dickens' Circumlocution Office.
If this is their idea of simplification, the mind boggles.

Without (and it is dead for service businesses) then this is an appalling idea and puts up the costs for small trades people for example, although i imagine many will just go 100% cash in hand.

I have just spent the past 6 months trying to teach 30-40 odd bright articulate clients formally on flat rate VAT how to do purchase VAT and its been a huge drain of time on them and me trying to explain it all.

Its a huge learning curve for clients to learn about VAT.

HMRC have not got a hope in hell in trying to get people with business of that size compliant.

Clearly they don't understand small business at all if they want to equate the VAT reg threshold with average income. They've missed the point that VAT is on turnover not profit, and the average business with £85k turnover probably has an average £26k profit. The mind boggles.

The Office of Tax Simplification should be disbanded they clearly don't understand their mission.

Why is it that the small businesses who have transformed the UK economy since the credit crisis always seem bear the brunt of government lunacy?

RTI (what was wrong with annual reporting), Auto-ennrolment (why not just add a bit to NI) , MTD and quarterly reporting, loopy employment status rules, new data protection rules it just goes on and on.

Pointless, pointless, pointless!!

None of this has contributed one iota to helping small business. It just sucks the life out of you.

Estonia apparently has the best and most competitive tax system in the world without the proliferation of rates and reliefs. So why not just have a close look at what they do. Its not rocket science

its fine, they just need to get their 'free' xero software - it will do everything you know....you don't need an accountant/tax adviser or anything....any advice they can get from the Revenue's 'free' helpline'....sorted.

The OTS are actually at pains to say they have not recommended changing to any particular option for VAT, but have recommended that the government/HMRC/HMT look at the possible options of a lower, higher or the same threshold.

In other words they have said "have a look at this", rather than actually recommending HMRC change the threshold.

The OTS were at a conference I attended yesterday and they said that HMRC were active in engaging with the process, so there may be some appetite for change.

However, given the OTS's track record in convincing government to simplify things I suspect this will be carefully looked at and nothing will be significantly changed!

It is just too easy to find reasons not to simplify if it disadvantages any taxpayers (voters).

Ah ,the good old days, when you looked at your publican client's figures and tried to estimate how much he was skimming and from where. My memory (likely faulty) is the landlords all seemed to be ex policemen.

Retailers books are just not as much fun these days, and these days I do not act for any pubs, newsagents and corner shops

I even have one retail client where there are days when everything is taken by card, no cash taken, not a penny.

Maybe nowadays the black economy doesn't need to be based around cash. Here's a possible Greek-style transaction but with a modern twist:

1. You go to see a solicitor. You verbally agree that he'll charge you £100 to write a letter to your neighbour complaining about the troublesome tree on their side of the boundary.

2. Your solicitor writes the letter and gives you an invoice for £5.

3. You transfer the remaining £95 to a paypal account he gives you linked to some hotmail email account, and possibly tied to an offshore bank account held in his wife's name. You use Paypal's "Friends and Family" feature to avoid any transaction fees.

4. There's no VAT for you to pay and not much tax for your solicitor to pay, a remarkably simple outcome. So the OTS can give themselves a big pat of the back.

I'm not surprised, apart from the threshold. I've said all along that the only way to get small business on MTD is to make all business VAT registered with no threshold. Level playing field etc. etc.
So it looks like the OTS have achieved their goal (which in my mind they were set up to do even if they didn't realise it) and that is to completely destroy the small business and get us all on PAYE.

Have to say I agree with John about the end goal of MTD. HMRC just doesn't like self employment and wants everybody on PAYE. Once MTD comes in, you'll never be able to get your boiler serviced or heating repaired by a local business again. They'll all end up either working for British Gas/one of the other big energy providers or they'll disappear into the black economy. So much for the free market!

Not only do the OTS not understand small businesses, they fail to see that it is private individuals who end up paying all the VAT as registered companies all reclaim it while I get jumped up bills for any purchases or works.

Will be catastrophic for the economy if they do this. There is already talk of a recession looming. Bringing small businesses back into the vat loop so Taxi drivers, window cleaners & plumbers come into it creates inflation for the public end users and the opportunity for a black economy for service based cash business. Inflation causes bank rates to increase, mortgages go up spending goes down, economy gets [***]. Great timing for this as the pending Brexit talks seem to be heading towards jumping off cliff.

This is totally left field and for me a massive step backwards if their actual goal is to simplify the tax system.

It'll be back the good ole days when you used to invite yourself round to your client, check the size and make of his TV, calculate the floor area of his home, check his car (make, model, and age) and then state that his income for the year was £xxxxx ........ after all, nobody kept proper books of account back then, and these "incomplete records" jobs were just plain fun peppered with a good degree of imagination ... but then I'm old enough to remember the "good" ole days .......... Sigh!

It seems to me that these proposals were originally formulated at a time when all businesses with a turnover of over £10,000 were going to be required to maintain accounting records in MTD compliant software. It would then have been pretty easy for HMRC to monitor the progress of all businesses through quarterly returns and probably the software would automatically flag up when someone exceeded the limit, at whatever that limit was set at. In theory, the limit could easily reduce on an annual basis and the software would deal with this as a matter of course.

This does look like an exceptionally easy way to gather more VAT through the forced use of MTD compliant software.

With the goalposts now changed due the acknowledged problems of forcing small businesses to use MTD compliant software, it looks to me as though we (the public) have paid a lot of money to the OTS for work that is no longer relevant, or not for the immediate future anyway.

The OTS to save face, have issued their report with some lame recommendations to try and justify the work they have done.

So whilst the newspapers are full of news about 1 million extra businesses having to register for VAT, the fact is that the anticipated storm has now been reduced to a light breeze and is of no further danger.

I am sure that all of the this will be resurrected in the future, but in the meantime the boards can be taken down from the windows and we can come out of the cellars and carry on as usual.

Are HMRC really geared up to process huge numbers of VAT registrations bearing in mind it can take anything between one to three weeks for them to process all the checks required. HMRC have been guarding VAT registrations due to fraud, now everybody's brother will have one. I remember reading somewhere about three years ago that our Civil Service had signed up to monthly VAT Returns to align with good old Europe. The way it is looking there will be national shortage of accountants rather than not requiring them at all. I seem to be spending increased amounts of time sorting out the ever changing Personal Tax Accounts. (BETA). ...... oh I could go on but you all know the problems.

Excellent idea. Would reduce the pressure on cash jobs and allow legitimate business to thrive without severe competition from the black market and a lack of enforcement. This cliff edge also stops business from expanding and taking on new employees. All depends whether HMRC actually police this or not. How many builders are in the nick for £50K cash jobs under the money laundering rules? For law to be effective it needs sanctions and enforcement. The illegals will still perhaps be off the radar with no consequences. But they will be easier to spot. They don't have these huge lets not bother levels in the rest of europe.

Put in context, we're one of the few countries that actually have a significant VAT registration threshold. Many countries (VAT is by no means an EU tax any more) use VAT registration as a means of registering businesses and keeping track of them. I can see the argument for this, plus it creates a level playing field for all businesses I suppose.

Nonetheless I agree that the administrative burden makes it unworkable, even with the Flat Rate Scheme.

Can't believe that the OTS is suggesting this(yes I can!) From my recollection, as an OLD accountant, VAT was a French Invention ( quelle surprise.) It is a stupid, complicated and bureaucratic method of raising revenue. Once we have left the EU why not scrap it and revert to good old fashioned purchase tax- known as Sales tax in the USA.; after all it is only really paid by the end retail user.
Another thought- if this would free up loads of VAT people in HMRC they could be redeployed to deal with imports and exports post BREXIT- 2 birds with one stone?!

That is unthinkable. What about the thousands of civil servants who would lose their jobs, the £millions lost by the banks as money stops endlessly going round in circles as it passes from supplier to supplier (through the bank each time), the super efficiency of HMRC as they would only have to police and collect monies from those that charge the purchase tax, the simplified book-keeping, the massive reductions in interest, fines and penalties for those that don't get VAT right at the moment and the reduced pressure on the NHS as people become less stressed.

In line with EU policy, why make something simple and efficient when you can make it complex and anything but efficient. Think of all the people who lose out when things are simplified.

I can confidently predict that VAT will not be scrapped in the foreseeable future.

Whereas Making Tax Digital [ MTD ] has been dubbed Making Tax Difficult , perhaps the Office of Tax Simplification [ OTS ] should now be dubbed Office of Tax Stupidity. What qualifications are needed to get into this quango ?
The only sensible comment to this otherwise moronic report is that someone has concluded the current VAT system is.......''awash with layers of complexity''. No prizes for guessing how successive Chancellors whims {aka Budgets } have contributed to the existing failing system .
Sadly those in power who are completely out of touch with small businesses , will continue to do what think they know is good for you and damn the consequences.
So next time Fred picks me up in his taxi , I'll warn him to be prepared for issuing VAT receipts.

Painful. However, now that we're Brexiting, this proposal if implemented would bring us much more into line with the rest of the EU. What could possibly go wrong?

Aside the many avoidance/complication comments already noted, and just to play devils advocate, it could be said that this would level the playing field for micro businesses. Would be handy though if we follow the French model which (I think) allows the reduced rate for 'local' goods and services - plumbers, independent restaurants etc. That then could benefit as many businesses as the reduced threshold would punish.

Ok let's say that all business should be VAT registered. In itself not an over bad thing. However VAT is not supposed to be a Tax on business. So let all business just put their VAT numbers on the invoice and no money (vatwise) changes hands. The only people who get an invoice with VAT on it would be joe public (which if I remember correctly is the point of vat). Ah, silly me HMRC wouldn't get that money from those business that weren't vat registered would they?
So I think we can safely say that the threshold won't be coming down anytime soon.